The UK Tax Year Straddles Two US Years: Matching Your Foreign Tax Credit

The UK tax year ends 5 April and the US tax year is the calendar year, so a single UK year falls across two US ones. The thing that has to be apportioned to the US year is the income, not the UK tax: the tax lands in one US year, fixed by the basis you file on, and no IRS rule splits it. On the paid basis it lands in the year you actually paid it; on the accrued basis the whole UK year's liability lands in the US year in which that 5 April falls.

That distinction is where almost every explanation of this problem goes wrong, and it is worth being precise about, because the two apportionments pull in opposite directions and only one of them is real.

Key takeaways

• Your US return reports calendar-year income. A P60 covers a UK tax year, so it cannot be dropped into a 1040 as it stands — you need the right twelve months, built from monthly payslips.
• Nothing in the primary sources apportions foreign tax across US years. Publication 514 and the Form 1116 instructions give a date rule, not a formula.
• On the paid basis, PAYE is the easy case: it is withheld month by month, so a January-to-December total is exact. Self Assessment is the hard case, because its instalments fall on fixed dates.
• On the accrued basis, the IRS says foreign tax generally accrues on the last day of the foreign tax year — so a UK year's income tax accrues on 5 April, wholly inside one US year.
• Getting the income figure wrong breaks the limitation calculation even when the tax is in the right year, because the limitation's numerator is your foreign-source taxable income for that US year.

Three questions that look like one

“The tax years are different” sounds like one problem with one answer. It is three, and they are settled by three different rules:

• Which US year does the income belong to? Always the calendar year in which you earned it. This is the one that genuinely requires apportionment, and it is not optional.
• Which US year is the UK tax treated as paid or accrued in? Determined by the basis on Form 1116, and in both cases the whole payment or the whole liability sits in one year.
• Can the credit actually be used in that year? A separate question again, answered by the limitation and the separate categories — not by timing at all.

Collapse those three and you get the advice that dominates this subject: pay your UK tax before 31 December. Sometimes that helps. Often it does nothing. Keeping them apart tells you which.

The income is the part that must be apportioned

Your 1040 reports what you earned over the calendar year, January to December. The UK tax year runs 6 April to 5 April, so every annual document a British employer or institution produces is cut to the wrong twelve months. GOV.UK describes the P60 as what you get “if you're working for them at the end of the tax year” — a UK-year summary, by design.

A P60 therefore cannot be transcribed onto a US return. One P60 covers roughly nine months of one US year and three months of the next, and no arithmetic performed on a single annual total can recover the split. Monthly payslips can, because each one is already dated. Two consecutive P60s plus the payslips that bridge them will give you a defensible January-to-December figure; a single P60 never will.

This matters beyond the income line, and this is the part usually missed. The credit is capped. Publication 514 states that your “foreign tax credit cannot be more than your total U.S. tax liability multiplied by a fraction”, where “the numerator of the fraction is your taxable income from sources outside the United States” and the denominator is your total taxable income from all sources. That numerator is a figure for the US tax year. Use a UK-year income figure and the cap is computed on the wrong number — so the credit is wrong even if every pound of UK tax is in exactly the right year.

On gathering the underlying records, rather than computing from them, we have set out separately which documents to request from a UK bank or employer and why the ones normally issued are the wrong ones — see the records section of our guide to the Streamlined Foreign Offshore Procedures. It is the same structural problem seen from the other end.

Where the UK tax actually lands

Here the sources are clearer than the commentary. Neither Publication 514 nor the Instructions for Form 1116 contains any rule for splitting foreign tax between US years. What they contain is a date.

On the paid basis

Publication 514: “If you use the cash method of accounting, you can claim the credit only in the year in which you pay the tax.” The question is simply when you paid, and UK tax reaches HMRC by two very different routes.

• PAYE is withheld as you are paid. Publication 514 notes that “a tax that is deducted from your wages is considered to be imposed on you”. Each month's deduction is paid in that month, so twelve payslips give an exact calendar-year figure. No apportionment is needed or appropriate — you are adding up the right twelve months, which is a different operation from splitting an annual total.
• Self Assessment arrives in lumps on fixed dates. Payments on account are due, per GOV.UK, “by midnight on 31 January and 31 July”, with the balancing payment “by midnight on 31 January the following year”. All three fall in whichever US calendar year contains those dates, and they relate to a UK year that straddles two. This, not PAYE, is where the mismatch actually bites.

On the accrued basis

Publication 514, on the accrual method: “Generally, this occurs on the last day of the foreign tax year for which your foreign return is filed.” For a UK filer that day is 5 April. So the entire UK year's income tax accrues on one date, inside one US year — again with nothing split.

Which produces a result worth stating plainly: electing the accrued basis does not line the years up. It credits a UK year's whole tax against the later of the two US years that year touched, while roughly nine months of the income it relates to sat in the earlier one. It makes the timing predictable, not matched. Whether that trade is worth making — and it carries a permanent cost, because the election binds every later return and closes the deduction alternative for good — is a separate decision we work through in what checking the Accrued box on Form 1116 actually commits you to.

Why “pay your UK tax before 31 December” is only half an answer

The advice is everywhere, and it is not wrong. It is just unlabelled. Accelerating a Self Assessment payment into the current calendar year moves it into that year's US return — on the paid basis. On the accrued basis the payment date is irrelevant: the liability accrued on 5 April whatever day the money left your account, so paying early achieves nothing at all.

Three further cautions before anyone acts on it:

• Paying a UK liability before it is finalised means paying an estimate. GOV.UK is explicit that if you reduce your payments on account and the bill turns out higher, “you'll be charged interest on the difference” — and the same uncertainty cuts the other way when you overpay to capture a credit.
• The US return is due before the UK one is settled, so you are often choosing a US position on a UK number that is not yet final.
• Pulling tax into this year empties next year. A tactic that fixes one year by borrowing from the next needs to be modelled across several years, which is what our calculators are for on the UK side before any US position is taken.

A perfectly matched year can still strand the credit

Timing is not the only gate. The limitation under section 904 is computed separately for each separate category of income, and Publication 514 is blunt about the consequence: “If your taxable income from sources outside the United States for a category of income is zero or less, your limit for that category of income is zero.” The statute sets out four categories; Form 1116 carries seven check-boxes, and a separate form is required for each one you use. UK salary and UK dividends do not sit together, which is a problem that no amount of year-matching solves — we treat it in why a Form 1116 credit cannot cross between the passive and general baskets.

Where the credit exceeds the limit, the Form 1116 instructions allow you to “carry back 1 year and then forward 10 years” the excess, applied within each separate category, and the instructions add that the period “can't be extended even if you are unable to take a credit in 1 of the intervening years”. There is no carryback or carryforward at all for the section 951A category. So a timing mismatch is usually survivable — but on a clock you cannot stop.

And none of this reaches UK taxes that were never creditable in the first place. National Insurance, council tax and stamp duty land tax each fail for their own reasons, set out in which UK taxes are actually creditable on a US return.

If an earlier year was built on the wrong twelve months

This is common, and the window to fix it is not the ordinary one. Section 6511(d)(3) substitutes 10 years for the ordinary three-year period of section 6511(a) where a refund claim relates to an overpayment attributable to creditable foreign taxes — and the detail most often got backwards is what the ten years run from. The statute measures them from the date prescribed for filing the return “for the year in which such taxes were actually paid or accrued”, which on these facts is frequently a different year from the one you are amending.

A claim for a carryback of an unused credit does not share that clock. Section 6511(d)(4) gives its own period: 3 years after the due date for the return of the year the credit went unused, or the section 6511(c) period, whichever expires later. Two different provisions, two different periods; any advice that quotes one figure for both is quoting the wrong one for at least one claim. The carry mechanics themselves are set out in how a foreign tax credit carries, and for how long.

A single payment whose timing you can still influence — a bonus, most often — is a narrower problem with more levers, and we handle it in timing a bonus across a 5 April UK year end and a 31 December US one.

Getting this right

In practice the order matters more than the cleverness. Build the calendar-year income from payslips first, because the limitation depends on it. Establish which basis your prior returns were filed on, because it may already be settled and you may not have chosen it. Only then ask where each UK payment lands, and separate PAYE from Self Assessment when you do — they behave differently and conflating them is what produces the invented apportionment you see on so many pages.

None of it is difficult arithmetic. What makes it go wrong is that the documents are cut to the wrong year and the available commentary contradicts itself on the one point that matters. This is the sort of position our US-UK tax specialists reconstruct routinely, and every return is reviewed and signed by a licensed professional before it goes anywhere — an IRS Enrolled Agent who is also ACCA-qualified, which matters here because half the facts are British and half American. If you would like a view on your own years, you can see what that costs on our pricing page or book a consultation.

Sources

• Publication 514, Foreign Tax Credit for Individuals — IRS
• Instructions for Form 1116, Foreign Tax Credit — IRS
• Understand your Self Assessment tax bill: payments on account — GOV.UK
• PAYE forms: P45, P60, P11D — GOV.UK

This article explains general principles and is not advice on your own facts. Rates, thresholds and deadlines change; figures here are checked against official sources on the date shown. Every return and filing we prepare is reviewed and signed by a licensed professional.